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Corporate Finance Tools in Daily Life
Many of the concepts associated with corporate finance also have applications in everyday life. A range of corporate finance tools are already used in everyday life, often without realization as corporate finance tools are often an extension of common financial practices. More complex corporate finance tools may also provide a great deal of potential to enhance daily life financial management. By looking at task associated with daily life it is possible to see the alignment.
A task undertaken in almost every household will be budgeting for household expenses, for example this will include budgeting for utility bills, insurance, food and travel. The budgeting may take place at different levels, for example, monthly or daily. The main budget will be undertaken each month, accounting for the essential items and liabilities. Where wages are paid on a monthly basis assessing outgoing in the same way is common sense.
Budgeting allows an individual to ensure that they pay all essential bulls before non-essential items are purchased. The assessment of income that may be available for the non-essential purchases is a parallel to creating a forecast for a monthly income and expenditure statement. The income is made up of wages and any other income that is received, for example, interest from investments. The outgoings are all of the liabilities and planned purchases such as groceries shopping and gas for the car. A good forecast on the required expenditure will allow an individual to see the level of surplus income they have at the end of the...
By budging the individual will not over spend as they will be able to assess the level of their net income after expenditure. For a firm this is the profit, but for the household it is the remaining disposable income.
Some months may be more difficult especially if there are large infrequent costs; not all bills will be on a monthly cycle. Therefore, budgeting also requires setting aside money towards payments that are due in the future. By forecasting for the coming months, as well as the current month, forecasting will enable the expenditure to be effectively managed.
When budgeting for large annual costs, some suppliers may offer discounts if payments are made in advance, or offer payments terms to spread the cost of a large purchase over a longer term. For example, car insurance can often be paid monthly over the period of a year for an additional cost. In addition to budgeting, the ability to assess the value of paying the premium in advance against the cost of paying it monthly to determine the relevant value of each option will enable optimal decision to be made.
Budgeting may also take place on a smaller scale, such as a shopping trip. Grocery shopping for a week is also subject to planning, ensuring compliance with the allocated budget and making adjustments were necessary.
Not all of the commonplace decisions made will concern managing expenditure; it may include assessing potential investment vehicles such as bank savings accounts and savings bonds. Understanding the way interest rates are calculated and the impact of the time…
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